A financial institution makes available an amount of credit to a business or consumer during a specified period of time.
Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy customers (though certain special-purpose lines of credit may not have creditworthiness requirements) to address fluctuating cash flow needs of the customer.
This means the borrower does not promise the lender any collateral for taking an unsecured line of credit.
[1] Secured lines of credit offer the lender the right to seize the asset in case of non-payment.
Since the unsecured credit line is not backed with collateral, if the borrower defaults on payments, the lenders cannot recover their losses.
Hence, the lenders can minimize their risk by charging high-interest rates and restricting the credit line limit.
It's important to note that these LOCs are designated as non-purpose, meaning the proceeds cannot be used to purchase additional securities, unlike a margin loan.
a, banks offer cash credit accounts to businesses to finance their working capital requirements.
This sanction is based on an assessment of the maximum working capital requirements of the organization, minus the margin.
Generally, a cash credit account is secured by a charge on the current assets (inventory) of the organization.
If all $30,000 is paid back, there is access to the entire $60,000 without having to reapply, one of the biggest benefits of a line of credit.